VMWare Up 8% on News of ‘The Pivotal Initiative’

EMC Corporation (NYSE:EMC) said at an analyst conference that it plans to spin out a new entity based on several assets known as “the Pivotal initiative,” pertaining to cloud, analytics and data. EMC will have 69% ownership of the company, while VMware (VMW), which is 80% owned by EMC, will own the remaining 31% of Pivotal. Shares of VMW are up 8% on the news, while shares of EMC Corporation are up 2.5%. Further details on the announcement below.

CFO Jon Chadwick provided initial details on Pivotal and the potential financial impact to VMware at the joint VMware, Inc. (NYSE:VMW)/EMC Corporation (NYSE:EMC) Strategic Forum in New York this morning.

Effective April 1, VMware layer 2 assets including VFabric, Gemfire, Cetas and cloud foundry will be transferred into Pivotal.

VMware will act as a sales agent for Pivotal and will receive a fee for sales support.

VMware will be contributing ~500 people to the initiative down from ~600 originally expected.

Pivotal is expected to have revenue of $300M (VMW contributes $130M in 2013) with an initial headcount of 1,250.

VMware will account for Pivotal on the balance sheet in other assets.

Plans are to follow a model similar to that as of VMware, with the intention of taking the company public at some point (12+ months from now).

VMware will receive a 31% stake in the new company in the form of preferred shares.

Total Addressable Markets Sized:

VMware, Inc. (NYSE:VMW) should have a total addressable market of $50B in 2016 up from $19B in 2012, a 20% CAGR according to analysts at RBC, they detail the numbers below:

The core computing business market should be $6B in 2016, reflecting a 10% CAGR.

End-user computing should be an $8B market in 2016, reflecting a 20% CAGR.

These two markets ($14B TAM) are the primary focus today.

Software defined data center should be a $28B market in 2016, reflecting a 20% CAGR.

The hybrid cloud should be a $14B market in 2016, reflecting a 30% CAGR.

Pivotal should have a total addressable market of $17B in 2016, reflecting a 30% CAGR.

Updated Guidance

Q1/13 Guidance:

No change to Q1 revenue guidance (a positive at this point in the quarter) but operating margins are expected to be 31%.

FY/13 Guidance:

Revenue is expected to be $5,120M-$5,240M (+11.2%-13.8%).

License revenue is expected to grow 6%-9%.

Operating margins are expected to be 32.5%-33.5%.

According to BAML analysts the big financial takeaway from the EMC Corporation (NYSE:EMC)-VMware, Inc. (NYSE:VMW) strategic forum is the acceleration in growth rate in the 2014-2016 time frame. This takes away a lot of uncertainty in the near term and should reinforce investor confidence in the growth story ahead pivoted on a firm core business and emerging software defined data center. C13 impact from Pivotal spinout is $110m and greater than the $50m BAMLexpected.

However, C13 apples to apples revenue growth rate remains at 14-16%, which is a big relief since the Street was gearing for a deceleration. Moreover, OM goes higher for C13 by 100 bps since Pivotal generates losses.

The biggest surprise was that the 15% growth rate in C13 is expected to accelerate gradually to 20% in C16. This coupled with OM expansion of 50 bps per year should support EPS growth north of 20% till 2016.

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